Court Decides that Severance Provisions in an Employment Agreement Formed an ERISA Plan:

The U.S. District Court for the Eastern District of Pennsylvania (the “Court”) recently issued its decision in the case of Zgrablich v. Cardone Industries, Inc., dealing with ERISA’s application to certain severance provisions in an employment agreement.

After the plaintiff was fired from his executive position with the defendant, the defendant refused to pay him certain severance benefits. He sued the defendant for those benefits in state court, but the defendant removed the case to the Court. In the current phase of the case, the Court only had to rule on the plaintiff’s motion to remand the case back to state court. In this connection, the main issue was whether severance payment provisions in the plaintiff’s employment agreement constituted an ERISA plan. (If so, the case can be heard by the Court instead of in state court.)

To address this issue, the Court began by noting that it had to determine whether “from the surrounding circumstances a reasonable person could ascertain the intended [severance] benefits, a class of beneficiaries, the source of financing, and procedures for receiving benefits.” The Court concluded that the employment agreement clearly provided those terms. The Court then turned to the question of whether the agreement’s severance benefits “require the establishment and maintenance of a separate and ongoing administrative scheme.”

While citing several court decisions, the Court ruled that such an administrative scheme exists in this case.  First, the defendant, “to determine the employee’s eligibility for and level of benefits, must analyze each employee’s particular circumstances in light of the [agreement’s] criteria.” Here, the defendant had to analyze whether the plaintiff was terminated without cause or for cause before paying severance benefits, because severance benefits varied significantly based on the reason for employment termination. Second, the severance benefits involved an ongoing administrative scheme in that after the plaintiff’s termination, the defendant had to monitor his behavior (e.g., to see if he violated the agreement’s non-compete clause, which would have resulted in termination of his severance payments).

Based on those facts, the Court ruled that the “parties here have provided a written agreement that satisfies all the requirements of an ERISA plan” and the defendant thus properly removed the case from state court to the Court.

You can read the Court’s full opinion here:

I recently assisted two clients with the determination of whether their severance benefit arrangements constitute an ERISA plan. This is a heavily fact-based determination, based largely on court decisions, and the implications of making the wrong determination in this regard are serious. Please let me know if you or your clients have any questions about their severance plan’s ERISA or non-ERISA status.